Allentown Investments Make $841,844

The city of Allentown gained $841,844 through investments in "very secure securities with the full backing of the U.S. government" during the first four months of this year.

Kenneth H. Kline Jr., manager of treasury and accounting operations who made the report yesterday, said, "The investment of city funds has saved city taxpayers more tax dollars than I am sure the majority of people ever realized."

He said being able to disclose the high returns was "a personal way of relieving 15 months of frustration and anxiety on the most negative news articles concerning the investment of city funds."

Kline's "frustration" concerned the potential loss of $510,000 in investments the city made through the bankrupt firm of ESM Government Securities in early 1985. The Securities and Exchange Commission has charged ESM with bilking more than $300 million from thousands of investors.

Kline said the city does not always experience the large yield it received in January-April this year. He citied a recent rally in the bond market for the high return.

The investments were made directly by the city and not through a third party, which was the case with ESM.

The purchases included Treasury notes and certificates of deposit.

"Since late 1984 when council amended the ordinance allowing the city to invest in various instruments per the Third Clast City Code, the city has enjoyed the benefits of a strong bull bond market," Kline said.

"By investing a portion of the city's portfolio in marketable government securities rather than non-negotiable CDs (certificates of deposit), the city has realized net gains on security transactions of $28,540 in 1984 (initial purchases and sales started in October), $628,930 in 1985 and $841,844 during the first four months of 1986.

"These security-transaction gains are in addition to interest income earned on the portfolio while the investments are held by the city. As with interest income, these gains are allocable to the various funds of the city based on the respective average daily cash balance of the fund.Therefore, all funds benefit from the returns of the portfolio."

Kline said any security gains in the future cannot be guaranteed or compared with those of the past because markets constantly change and, "the bond-market rally will die at some point."

The money used for the investments came from general funds which have yet to be spent, the sewer and water funds, and an earned-income tax escrow account.

Kline said the investments will continue as long as the city has residual funds. He noted that funds are kept aside for the day-to-day city operations.

He said the returns will be lower with each passing month as the city pays bills when they come due, and has less to invest.

About $14 million of the city's $25-million investment portfolio is place in long-term government securities rather than short-term CDs.

Kline stressed that the $841,844 will help bolster the city's year-end balance, which is listed as $329,431 in the budget, and will lessen the potential tax increase expected next year.